The year has begun on a somewhat strange note for our stock market. It is not running away nor breaking down, simply gyrating in a range. Sessions have been volatile, mid- and small-caps have sold off while large-caps have taken turns to hold the Nifty up. Almost running to stand still. The Nifty seems in a broad range of 6,100-6,350 while the broader market skims off some of its recent excesses.
It is important to understand the backdrop for such a market. There is an overload of material information for the market at this point, information that is pulling it in all directions. Globally, the cues from the US are disastrous, yet the expectations from the US Fed have moved swiftly from 25 to 50 and now even a 75 basis point cut in January. The crashing Dow may be affecting sentiment but the prospect of much more liquidity coming this way is balancing that negative trigger. Take the primary market. While the large IPOs of January and their runaway grey market quotes are bolstering investor sentiment, the fact that they have sucked away a lot of money from the secondary market is clearly visible in the stress on small-caps. Technically, the futures market is extended but the carrot of a good budget is keeping trader sentiment afloat. There is some discomfort among professional investors about the gay abandon with which lofty valuations are being ascribed to dreams and Excel sheets but a new breed of retail investors is neutralising this scepticism with the weight of money. Finally, there is the earnings season. The market has one eye on all these varied pulls and pressures even as it focusses on earnings that are tumbling out every day. Add to this global commodity swings, the dollar, local interest rate expectations and one can begin to understand why the market is not making a decisive dart in either direction. The triggers are mixed and finely balanced, there is almost a violent equilibrium that has been struck out.
Also, the valuation aspect is important. Having reached where we are with stock prices, it may be becoming a struggle to climb to even higher PE platforms without the crutch of delivered earnings growth, probably the reason why the market could be pausing to see the numbers before making its next move. Any rerating has to have some fundamental basis, after all. So, what may seem a bit strange and confusing to traders and investors is perhaps not quite so once you put it in context. The busy season is on full tilt and the market has its hands full.
The writer is Executive Editor, CNBC-TV18